PMI data set to take centre stage

23 May, 2016

Equity markets continued to struggle for direction on both sides of the Atlantic last week, with the Dow posting its fourth negative week in a row and its worst losing streak since 2014, though the S&P500 did manage to eke out a weekly gain.

It was a similar story for European markets with the DAX closing the week lower, while the FTSE100 managed to just about finish in positive territory, despite oil prices posting their best levels since November last year.

The levels of uncertainty that appear to have plagued investors for several weeks now appear to show no signs of abating as speculation about when the US Federal Reserve might increase interest rates takes over as the main preoccupation for a lot of investors after a series of hawkish interventions last week.

These interventions don’t look likely to diminish over the next week or so as markets digest weekend comments from Boston Fed President Eric Rosengren that appear to show him starting to lean towards pushing towards a rate rise in the next couple of months. Mr Rosengren has, in the past, generally tended to be viewed as one of the more dovish members of the FOMC, and given he is a voting member this year, his views carry some weight. While he was careful to temper his comments with respect to timing it seems to appear that the Fed is leaning towards a lower bar for acting as they look to steer market expectations towards a higher probability for acting than was being priced just over a week ago.

In this context investors will be looking towards this week’s latest US data, including US Q1 GDP, as well as a succession of Fed speakers starting today with the St. Louis Fed’s James Bullard, followed by John Williams of the San Francisco Fed.

Unsurprisingly there wasn’t anything particularly substantial that came out of the beginning of this weekend’s G7 meeting in Sendai, in fact the most talked about moment came when the Governor of the Bank of Japan, Haruhiko Kuroda appeared to get rather over familiar with a certain part of UK Chancellor Osborne’s anatomy, as the delegates were posing for a meet and greet in front of the assembled press, in what could be only be described as introducing a rather bum note to the proceedings.

Mr Kuroda did also warn that a “Brexit” would pose a major risk to global growth while at the same time defending the Bank of Japan’s negative interest rate policy on the same day that data showed that both Japanese imports and exports declined sharply in April.

In Europe we’ll get to see the latest preliminary manufacturing and services PMI data for May from France and Germany which are expected to show some modest improvements on the April numbers.

France manufacturing is expected to increase from 48 to 49, still in contraction territory, and services from 50.6 to 50.8, while German manufacturing is expected to come in at 52.1, up from 51.8, with services coming in at 54.6 from 54.5.

The latest Markit US manufacturing survey is expected to show that after a relatively weak April showing of 50.8, that activity picked up slightly to 51, however given recent weak regional surveys it is clear that the US manufacturing sector continues to struggle with weak economic activity.

EURUSD – we’ve seen a drift below the April lows at 1.1215/20 to 1.1180 which has thus far prompted a rather weak rebound. We could well see a move towards trend line support at 1.1110 from the December lows, and even the 1.1030 area. We need to see a move back through 1.1430 to stabilise.

GBPUSD – the pound continues to remain supported, with potential for a move towards 1.5000, despite a sharp pullback on Friday. The main resistance remains near this month’s high just above 1.4700, with support back down near 1.4520 and the recent lows at 1.4330.

EURGBP – despite breaking below the 0.7760 neckline support area last week Friday’s rebound has triggered a sharp reversal. While below the 0.7770 area the odds favour a continued move towards the 0.7500 area, on a sustained break below the 0.7680 area.

USDJPY – the US dollar appears to be running into a bit of a wall just above the 110.40 area for now. There is a risk we could well head back towards the 111.00 area, but for now the risk still remains towards the downside and a move back to the 106.00 area. We could head all the way back to the 113.00 area without undermining the recent downtrend, though that isn’t the preferred option.

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20 May 2016

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